Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212302 
Year of Publication: 
2014
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 27/2014
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper investigates the macroconomics of real interest rates when there are constraints on debt finance, used both for insurance against income shocks and transferability of resources over time. We amend a standard continuous-time deterministic model of international exchange, with patient and impatient countries, introducing country level shocks fully diversifiable at the global level. A series of shocks that push one country towards its leverage limit induces substantial pre-cautionary saving and a collapse of real interest rate relative to the deterministic benchmark. We discuss the resulting dynamics of interest rates and the broader implications for macroeconomic modelling.
Subjects: 
borrowing constraints
debt management
incomplete financial markets
international macroeconomics
finance and macroeconomics
macroeconomic propagation
precautionary saving
systemic risk
JEL: 
E44
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-006-4
Document Type: 
Working Paper

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